Creative real estate investing

Creative real estate investing is a term used to describe non-traditional methods of buying and selling real estate. Typically, a buyer will secure financing from a lending institution and pay for the full amount of the purchase price with a combination of the borrowed funds and his own funds (or his "down payment").
One way to buy a home is to pay cash. But the typical American family is not in a position to do this, and thus must arrange to finance its home purchase. Most families can afford only a modest down payment and are forced to secure the remainder of the purchase price by mortgage from some lending institution. The larger the down payment, the smaller the total interest payment over the term of the mortgage. Buyers, however, should not use all of their savings for the down payment, thus depriving themselves of any reserve to fall back on if extraordinary expenses arise or income falls in the future.
Bird-Dogging
"Bird dogs" get paid a referral fee for finding good deals for other investors. This is often where people begin their investing career as there is only time at stake. They are typically paid when the deal closes. Some birddogs will structure companies and partnership arrangements as they're frequently not real estate agents and may not be able to collect a "referral fee" for their services.

[edit] Seller finance or "subject to"
Seller financing can refer to one of two things:
The seller can act as a bank and rather than receiving all or a portion of their equity at close, they can "lend" it to the buyer and receive a regular payment as agreed. They may receive no payments, interest only payments, principal only payments, or a combination. It could be an interest only loan, or an amortized loan. Additionally it could carry either a fixed rate interest payment or a variable rate. These will vary depending on the agreed upon terms of the contract between the buyer and the seller.
The seller can allow the buyer to "take over" the loan that he or she has in place. This can be done in two ways. The first way is called an "assumption", wherein the lender formally allows the buyer to assume the loan. This entails approval of the buyer's credit, and often a modification of existing loan terms. The other method is called a "subject to" where the lender is not contacted, and the buyer purchases the property "subject to" the existing financing. This can be financially risky in many ways, since many loans have acceleration clauses which permit the lender to call the loan due if the property is transferred. However, more often than not the lender will not exercise the "due on sale clause" if the payments are being made on the underlying mortgage(s). In the rare event that a lender does call the loan due then an investor could quickly sell the property or pay off the loan using any one of the various financing options available, some of which are described below.

[edit] Options
Main article: Option (finance)
An option is defined as the right to buy a property for a specified price (strike price) during a specified period of time. An owner of a property may sell an option for someone to buy it on or before a future date at a predetermined price. The buyer of the option hopes the value of the property will either go up or is already low. The seller receives a premium called "option consideration". The buyer may then either exercise the option by buying the property or sell the option to someone else to exercise (or sell). This is often done to obtain control over a property without much cash. Option premiums are typically non-refundable. The option represents an equitable interest in the property and may be recorded at the county recorders office.

[edit] Lease option
Main article: Lease-option
This is made up of two parts: A lease, or rental agreement, and an option. They may be written together as one contract or as two. The Lease is simply a rental agreement between the owner and the potential lessee (tenant). Often these leases will be "triple net lease" leases (NNN) in which the lessee is responsible for paying for the taxes, insurance, maintenance, and upkeep of the property. The lease payment is typically 5-15% higher than rent might be for the same property. This type of lease can be structured so that the lessee can take the tax benefits as if he were the home owner.

[edit] Sandwich lease option
This is simply using a lease option to buy a property and then immediately selling it on a lease option. Typically the seller would collect a larger option premium and a larger monthly lease amount. They would keep the spread between each as their profit.

[edit] Short sale or preforeclosure
When a property owner fails to make their mortgage payments for a number of months they are in default. The first step of the foreclosure process (which typically takes a number of months) that the lender will take is to file the notice of default. This is a public document that is recorded. The property owner will contract to sell the home conditioned upon the lender accepting a lesser amount than what is owed on the mortgage. Note that there are no similarities between a real estate short sale and selling a stock short.
In many jurisdictions, including the United States, the seller is responsible for taxes on the amount of the mortgage left unpaid after the sale as ordinary income.

[edit] Wholesaling
Wholesalers typically make smaller profits but buy and sell properties in large quantities. They may buy 50 homes at a time from a bank and then sell them for a small markup to move them quickly and do it again.
A more common wholesale approach among creative real estate investors is to secure properties with no money down and do a "quick flip". Typically the property, or owner must be distressed in some way for the deal to make sense.

[edit] Hard money lenders
These are often used to finance projects that are unconventional, great deals, or where money is needed quickly. Typically hard money lenders will lend 50-70% of the value of the property regardless of the sales price (unlike banks). They will typically close loans in 2-7 days. Credit scores and income are often overlooked by hard money lenders, however they may ask to see a business plan or exit strategy for the project. They may get paid via points (e.g. 1 point equals one percent of the total amount borrowed), interest rate (10-20% per year is common), and an equitable interest. These will vary based on the size of the project and the agreed upon contract. Hard money lenders are collateral based and typically require first position on the property.

[edit] Tax liens
Main article: Tax liens
This may not clearly fall in the category of "real estate investing", however it is worth mentioning. Each state creates the system and rules for the lien or deed process so careful research is necessary. In general, property owners are notified regarding the amount of taxes owed and are given a period of time to pay. If the amount remains delinquent, the state will take one of the following paths (though some have created a hybrid):

[edit] Tax lien state
The county in which the property is located sells the lien certificate at a sale or auction. Some states sell the lien for the delinquent amount while others allow bidding to begin at that price. The purchaser of the tax lien collects interest (predetermined by the state) from the home owner on the amount that was paid for the tax lien. If the tax lien (with interest) goes unpaid during the redemption period, the investor may foreclose on the home. Unlike most foreclosures, when a tax lien is foreclosed on, all other liens and mortgages are abolished and the property would be owned "free and clear". Typically the lender will pay off the tax lien to avoid losing their house and/or property.

[edit] Tax deed state
The county government sells the deed to the property at a public sale or auction. The benefit for investors is the ability to purchase property at discounted rates, often for the amount owed in taxes. When an account becomes delinquent, the property is listed at the tax assessor's office, some are even online. Properties with homes are usually purchased by investors (often referred to as sharks) prior to foreclosure.

[edit] Paper/notes/mortgage investing
This also is less of a "creative real estate investing" technique as typically described. Mortgages are often sold by lenders to other lending institutions. Investors can broker transactions by arranging buyers and sellers of notes to meet or by buying them and immediately selling them for a profit.

[edit] Flipping
Main article: Flipping
Flipping is buying an under priced property and then quickly reselling it at market value. Homes are typically sold below value by uninformed sellers or those in distress (like job loss or foreclosure). Often a property is sold under market value because it is a "fixer upper". Sometimes they require very little such as paint and carpet and other times they have mold, asbestos, or foundation issues. These inherently hold more risk and more work, and therefore often have substantial profits.

[edit] Land trust
Main article: Land trust
Land Trusts have traditionally been used as a non-profit entity to own property. In recent years, many companies have developed methodologies that allow for Land Trusts to be used to acquire properties in foreclosure allowing homeowners to save their homes and making it possible for investors to see incredible returns. In a Real Estate Investment model Land Trusts bring ease to the transaction. While some people believe that using a Land Trust also brings a benefit of not causing Due-on-Sale clauses to force the refinancing of the subject property, this is only true when the borrower is and remains a beneficiary of the trust and which does not relate to a transfer of rights of occupancy in the property. While the use of Land Trusts by real estate investors does make it more difficult for a lender to discover a transfer has occurred, the loan can still be accelerated if it is discovered since a transfer has occurred.

Creative real estate investing 2008-07-09T20:47:00-07:00 Rating: 4.5 Diposkan Oleh: Merlyn Rosell